What Is Order To Cash? The Process And How Is It Performed?

As the name states, this process starts with the order and ends with the payment. The Order-To-Cash cycle covers the entire process, starting from placing the order, and ends after the payment. Once you update the books of accounts, the process ends.

It is also called O2C or OTC. During investor’s meet or any other in-office meet, you will hear these two terms a lot. The management uses these terms a lot while discussing the finance aspect of direct customer sales.

The concept of stating OTC has a fair share in the books of accounts. It eases out the operation for the management team. It informs them about the inflow of cash via order sales and also impacts working capital.

Order To Cash Cycle – Product Based Company

Order Governance

The OTC cycle starts right after you receive the order, it can be via internet or walk-in, your system should prompt a received order. The most efficient way is to automate your order management system. It will prove to be very efficient for your business, as it will save human effort and you will know whenever you receive an order. Here are the six ways to automate your Warehouse Management System. 

Supply-Chain Management

After successfully accepting the order, the next cycle of the supply chain begins. The next aim for you as a business owner is to inform the inventory official about the order. He will then prepare the order and make it ready for shipment. Make sure you convey accurate order details to the inventory manager. It’ll be better if you can even grant him access to your software, which will make it easier for the manager to note down the order. Here’s the list of 9 mobile apps, every business owner must have in their phone. 

Invoice Management

For managing invoices and payments, the best way is to send the invoice along with the order. It is the most widely used way to generate an invoice. The invoice should specify all the details regarding the product and the order inside the box. The invoice should include information regarding the taxes as well or discounts details. To know in details about the top elements your Invoice should have, click here. 

Also, you should provide multiple payment options to the customer. It is highly advantageous for the company as well as benefits the customer. This method reduces the rate of delay in payment, and also, the payment failure rate drops down.

Accounting

Once all the above cycles are complete, update the order in the books of accounts. If you use any software, then automatically, the entry would be made in the books. If not, you will have to manually maintain the books of accounts and enter the details of the transactions.

Order To Cash Cycle – Service Based Company

A service-based company generally offers subscription plans to its customers. The subscription plans are recurring ones, therefore, they do not have a fixed ending period. The subscription amount is due every month or year.

Therefore, the Order-to-Cash cycle is a bit different. However, the majority of the parts are the same. But the O2C cycle, in the case of the subscription-based model, includes several other aspects. Which eventually increases the cost of the subscription plan.
While determining the OTC cycle of the subscription-based model, you will have to include cancellation fees, refunds, discount offers, promo-code offers, and a lot more.

The CTC cycle is maintained separately for all the payment cycles. For instance, a separate CTC gets recorded for monthly subscription plans, and the same goes for yearly subscription plans.

Managing the order from the starting of the cycle will give you an added advantage, and it is a best practice you can follow. As soon as you receive the order, make a habit of tracking the order from the starting, and make sure you satisfy the customer by sending the order on time. That is only possible once you start tracking orders from the start.

Following these best practices, already? Now that you know what is order to cash, Here’s how you can improve the O2C cycle of an Organization.

Challenges Faced

First and foremost, to improve any cycle, you need to figure out the challenges faced in the process. Therefore, some of the common challenges faced under the OTC cycle are:

– Invoicing Procedure

When the procedure of billing or invoicing is manual, there are a lot of errors that a human brain/hand can make. Therefore, manual invoicing is a limitation.

– Imperfect Data Points

Many times, due to mismanagement, the order gets repeated, and then the company bears losses. Therefore, it is equally important to enter the correct information.

– Customer Dissatisfaction

If there is a delay in the order management and the entire process, then there are high chances that the customer will receive the order late. Therefore, it leads to an increase in the opportunity cost.

– Data Security

Keeping the data safe is a tedious task for an entrepreneur. You have to make sure there is no breach from your side.
There are more difficulties faced by the business while managing the OTC cycle. These are some significant limitations the business face. However, here are some tips to help you reduce the hardship.

TIPS

Take a standardized approach.

Consistency is essential while running a business. Therefore, make sure, whenever you face a specific problem, approach it with a consistent level of intensity. Also, create the same habit among your employees, it will make them feel part of the organization, and also, it will increase efficiency in them.

Use Technology wherever possible.

Do not hesitate to use AI anywhere you feel is needed. Whether it is a supply chain or inventory management, use algorithmic tools. It will reduce errors and also increase efficiency by 10x. Managing the entire process will also become simple. You won’t be roaming around gathering books and employing people to maintain those books. In the current scenario, you will need an IT guy and a decent cloud computing agency.

Bottom Line

To make optimum use of the OTC cycle, you will need to monitor it regularly. Schedule the time, weekly or monthly, to monitor the OTC cycle. The improvement in the cycle will become noticeable.